A new era for U.S. residential solar finance: ITC, loan market headwinds shaking up landscape

residential solar installers

Last year was a record-breaking but chaotic year for the residential solar industry. The market installed 1,687 MWdc in Q4 to reach 5.9 GWdc of annual installed capacity, a remarkable 40% increase over 2021. The loan market continued its dominance of the past five years, achieving its largest volume of installed capacity. However, the segment faces challenges with interest rate increases and bank turmoil.

Since the passage of the Inflation Reduction Act (IRA), there has also been more enthusiasm for the future growth of the third-party ownership (TPO) segment. TPO systems are eligible for the ITC adders while customer-owned systems are not. Continued loan market headwinds and the TPO ITC adder pricing advantage will lead to a shift in the residential solar financing environment starting this year.

GoodLeap continues its reign as leading financier

The top five players financed 71% of the entire residential market in 2022, similar to 2021. GoodLeap grew by 40% last year to capture 26% of the overall residential solar market and 36% of the loan market in 2022. Sunrun and Sunnova again dominated the TPO market, together capturing a 79% share.

Overall, many financiers funded record volumes in 2022, which drove the residential solar market to new levels last year.

A first since 2014, TPO segment outpaces customer ownership

Wood Mackenzie expects that the TPO segment will grow by 23% while the customer-ownership segment will grow by 4% in 2023. Recent banking turmoil will impact both segments this year, resulting in increased financing costs and tighter credit standards. Interest rate increases will also continue to impact both segments but will negatively affect loans more than the TPO segment.

Loans have more interest rate sensitivity than TPO products. This is primarily driven by the typical financing make-up of the products — debt for loans versus a portion of debt and equity for TPO. Further, customers make fewer unscheduled principal loan prepayments in an inflationary environment, which increases the cost of loans and decreases returns for loan providers.

After reaching its highest annual market share of 70% in 2022, the loan market will lose share for the first time since 2016. In contrast, the TPO market will start to win back share in 2023 as financiers begin to qualify systems for the ITC adders and partner with more installers to offer TPO products. After hitting its lowest annual share in 2022, we expect that the segment will record its highest volume of installed capacity in 2023.

California NEM 3.0 to impact both solar financing segments in 2024, but TPO more resilient

The residential solar market will contract by 3% in 2024, the first full year impacted by  California NEM 3.0. However, the TPO segment will continue to benefit from the ITC adders and gain share, growing by 10% in 2024 and an average rate of 20% in 2025 and 2026.

Storage offerings and expertise will become more vital to success in California under the new net billing regime. Major TPO providers continue to expand storage products nationwide and will capitalize on this shift in California.

The customer-owned market will contract by 7% in 2024 as loan providers struggle to regain footing from interest rate headwinds and the implementation of California NEM 3.0. The segment will begin to recover in 2025 but will grow slower than the overall residential solar market in 2025 and 2026.

U.S. residential solar ABS and solar loan credit performance have declined

Solar asset-backed securitization (ABS) transactions totaled US$3.89 billion in 2022 and averaged US$324 million per transaction size. This is a slight decrease compared to the 2021 total, but a year-over-year increase in average transaction size.

There has also been a rise in delinquency and loss rates, coupled with a significant drop in solar loan prepayments. This can be attributed to rising interest rates and inflation, among other factors, and will contribute to a slowdown in the loan market this year.

Authored by Zoë Gaston, principal analyst, U.S. distributed solar, for Wood Mackenzie.

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